Document

______________________________________________________________________________________________________

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2018

or

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number 1-9804 

PULTEGROUP, INC.
(Exact name of registrant as specified in its charter) 
MICHIGAN
 
38-2766606
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)

3350 Peachtree Road NE, Suite 150
Atlanta, Georgia 30326
(Address of principal executive offices) (Zip Code)

Registrant’s telephone number, including area code: (404) 978-6400

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    YES  [X]   NO  [ ]

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). YES  [X]   NO  [ ]

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company” and "emerging growth company" in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer  [X]
  
Accelerated filer  [ ]
  
Non-accelerated filer [ ]  
  
Smaller reporting company [ ]
Emerging growth company [ ]
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. [ ]

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  
YES [ ]  NO  [X]

Number of common shares outstanding as of April 19, 2018: 285,524,839 ______________________________________________________________________________________________________

1

PULTEGROUP, INC.
TABLE OF CONTENTS

 
 
Page
No.
PART I
 
 
 
 
Item 1
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 2
 
 
 
Item 3
 
 
 
Item 4
 
 
 
PART II
 
 
 
Item 2
 
 
 
Item 6
 
 
 
 
 




 

2

PART I. FINANCIAL INFORMATION

Item 1.      Financial Statements

PULTEGROUP, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
($000’s omitted)
 
 
March 31,
2018
 
December 31,
2017
 
(Unaudited)
 
(Note)
ASSETS
 
 
 
 
 
 
 
Cash and equivalents
$
150,821

 
$
272,683

Restricted cash
33,966

 
33,485

Total cash, cash equivalents, and restricted cash
184,787

 
306,168

House and land inventory
7,465,028

 
7,147,130

Land held for sale
69,522

 
68,384

Residential mortgage loans available-for-sale
385,453

 
570,600

Investments in unconsolidated entities
64,810

 
62,957

Other assets
784,355

 
745,123

Intangible assets
137,542

 
140,992

Deferred tax assets, net
614,898

 
645,295

 
$
9,706,395

 
$
9,686,649

 
 
 
 
LIABILITIES AND SHAREHOLDERS’ EQUITY
 
 
 
 
 
 
 
Liabilities:
 
 
 
Accounts payable
$
446,304

 
$
393,815

Customer deposits
308,864

 
250,779

Accrued and other liabilities
1,226,233

 
1,356,333

Income tax liabilities
115,667

 
86,925

Financial Services debt
246,952

 
437,804

Notes payable
3,087,718

 
3,006,967

 
5,431,738

 
5,532,623

Shareholders' equity
4,274,657

 
4,154,026

 
$
9,706,395

 
$
9,686,649


Note: The Condensed Consolidated Balance Sheet at December 31, 2017 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by U.S. generally accepted accounting principles for complete financial statements.


See accompanying Notes to Condensed Consolidated Financial Statements.


3

PULTEGROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(000’s omitted, except per share data)
(Unaudited)
 
 
Three Months Ended
 
March 31,
 
2018
 
2017
Revenues:
 
 
 
Homebuilding
 
 
 
Home sale revenues
$
1,911,598

 
$
1,585,421

Land sale and other revenues

12,557

 
2,690

 
1,924,155

 
1,588,111

Financial Services
45,938

 
41,767

Total revenues
1,970,093

 
1,629,878

 
 
 
 
Homebuilding Cost of Revenues:
 
 
 
Home sale cost of revenues
(1,459,940
)
 
(1,217,678
)
Land sale cost of revenues
(11,548
)
 
(3,228
)
 
(1,471,488
)
 
(1,220,906
)
 
 
 
 
Financial Services expenses
(32,213
)
 
(28,367
)
Selling, general, and administrative expenses
(240,893
)
 
(236,268
)
Other expense, net
(1,308
)
 
(5,072
)
Income before income taxes
224,191

 
139,265

Income tax expense
(53,440
)
 
(47,747
)
Net income
$
170,751

 
$
91,518

 
 
 
 
Per share:
 
 
 
Basic earnings
$
0.59

 
$
0.29

Diluted earnings
$
0.59

 
$
0.28

Cash dividends declared
$
0.09

 
$
0.09

 
 
 
 
Number of shares used in calculation:



Basic
286,683

 
317,756

Effect of dilutive securities
1,343

 
2,329

Diluted
288,026

 
320,085




See accompanying Notes to Condensed Consolidated Financial Statements.


4

PULTEGROUP, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
($000’s omitted)
(Unaudited)

 
Three Months Ended
 
March 31,
 
2018
 
2017
Net income
$
170,751

 
$
91,518

 
 
 
 
Other comprehensive income, net of tax:
 
 
 
Change in value of derivatives
21

 
21

Other comprehensive income
21

 
21

 
 
 
 
Comprehensive income
$
170,772

 
$
91,539





See accompanying Notes to Condensed Consolidated Financial Statements.


5


PULTEGROUP, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
(000's omitted, except per share data)
(Unaudited)
 
Common Stock
 
Additional
Paid-in
Capital
 
Accumulated
Other
Comprehensive
Income
(Loss)
 
Retained
Earnings
 
Total
Shares
 
$
 
Shareholders' Equity, January 1, 2018
286,752

 
$
2,868

 
$
3,171,542

 
$
(445
)
 
$
980,061

 
$
4,154,026

Cumulative effect of accounting change (see Note 1)
—

 
—

 
—

 
—

 
22,411

 
22,411

Stock option exercises
284

 
3

 
2,720

 
—

 
—

 
2,723

Share issuances, net of cancellations
783

 
8

 
3,477

 
—

 
—

 
3,485

Dividends declared
—

 
—

 
—

 
—

 
(26,051
)
 
(26,051
)
Share repurchases
(1,941
)
 
(20
)
 
—

 
—

 
(59,471
)
 
(59,491
)
Share-based compensation
—

 
—

 
6,782

 
—

 
—

 
6,782

Net income
—

 
—

 
—

 
—

 
170,751

 
170,751

Other comprehensive income
—

 
—

 
—

 
21

 
—

 
21

Shareholders' Equity, March 31, 2018
285,878

 
$
2,859

 
$
3,184,521

 
$
(424
)
 
$
1,087,701

 
$
4,274,657

 
 
 
 
 
 
 
 
 
 
 
 
Shareholders' Equity, January 1, 2017
319,090

 
$
3,191

 
$
3,116,490

 
$
(526
)
 
$
1,540,208

 
$
4,659,363

Cumulative effect of accounting change
—

 
—

 
(406
)
 
—

 
18,643

 
18,237

Stock option exercises
961

 
10

 
11,108

 
—

 
—

 
11,118

Share issuances, net of cancellations
677

 
10

 
3,556

 
—

 
—

 
3,566

Dividends declared
—

 
—

 
—

 
—

 
(28,838
)
 
(28,838
)
Share repurchases
(4,696
)
 
(50
)
 
—

 
—

 
(105,472
)
 
(105,522
)
Share-based compensation
—

 
—

 
10,682

 
—

 
—

 
10,682

Net income
—

 
—

 
—

 
—

 
91,518

 
91,518

Other comprehensive income
—

 
—

 
—

 
21

 
—

 
21

Shareholders' Equity, March 31, 2017
316,032

 
$
3,161

 
$
3,141,430

 
$
(505
)
 
$
1,516,059

 
$
4,660,145



See accompanying Notes to Condensed Consolidated Financial Statements.

6

PULTEGROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
($000’s omitted)
(Unaudited)
 
Three Months Ended
 
March 31,
 
2018
 
2017
Cash flows from operating activities:
 
 
 
Net income
$
170,751

 
$
91,518

Adjustments to reconcile net income to net cash from operating activities:
 
 
 
Deferred income tax expense
23,479

 
39,226

Land-related charges
3,419


3,535

Depreciation and amortization
11,890

 
13,209

Share-based compensation expense
8,451

 
14,161

Other, net
(793
)
 
555

Increase (decrease) in cash due to:
 
 
 
Inventories
(237,169
)
 
(267,014
)
Residential mortgage loans available-for-sale
185,147

 
194,117

Other assets
(9,246
)
 
21,858

Accounts payable, accrued and other liabilities
13,084

 
(71,362
)
Net cash provided by (used in) operating activities
169,013

 
39,803

Cash flows from investing activities:
 
 
 
Capital expenditures
(15,428
)
 
(9,996
)
Investments in unconsolidated entities
(1,000
)
 
(14,802
)
Other investing activities, net
452

 
1,423

Net cash used in investing activities
(15,976
)
 
(23,375
)
Cash flows from financing activities:
 
 
 
Repayments of debt
(451
)
 
(1,067
)
Borrowings under revolving credit facility
768,000

 
—

Repayments under revolving credit facility
(768,000
)
 
—

Financial Services borrowings (repayments)
(190,852
)
 
(191,240
)
Stock option exercises
2,723

 
11,118

Share repurchases
(59,491
)
 
(105,522
)
Dividends paid
(26,347
)
 
(29,102
)
Net cash provided by (used in) financing activities
(274,418
)
 
(315,813
)
Net increase (decrease)
(121,381
)
 
(299,385
)
Cash, cash equivalents, and restricted cash at beginning of period
306,168

 
723,248

Cash, cash equivalents, and restricted cash at end of period
$
184,787

 
$
423,863

 
 
 
 
Supplemental Cash Flow Information:
 
 
 
Interest paid (capitalized), net
$
30,109

 
$
12,830

Income taxes paid (refunded), net
$
631

 
$
1,043



See accompanying Notes to Condensed Consolidated Financial Statements.

7

PULTEGROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)


1. Basis of presentation

PulteGroup, Inc. is one of the largest homebuilders in the United States ("U.S."), and our common shares trade on the New York Stock Exchange under the ticker symbol “PHM”. Unless the context otherwise requires, the terms "PulteGroup", the "Company", "we", "us", and "our" used herein refer to PulteGroup, Inc. and its subsidiaries. While our subsidiaries engage primarily in the homebuilding business, we also engage in mortgage banking operations, conducted through Pulte Mortgage LLC (“Pulte Mortgage”), title services, and insurance brokerage operations.

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles ("GAAP") for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal, recurring adjustments) considered necessary for a fair presentation have been included. Operating results for the interim periods presented are not necessarily indicative of the results that may be expected for the full year. These financial statements should be read in conjunction with our consolidated financial statements and footnotes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2017.

Use of estimates

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.

Reclassifications

Certain prior period amounts have been reclassified to conform to the current year presentation.

Subsequent events

We evaluated subsequent events up until the time the financial statements were filed with the Securities and Exchange Commission (the "SEC").

Other expense, net

Other expense, net consists of the following ($000’s omitted): 
 
Three Months Ended
March 31,
2018
 
2017
Write-offs of deposits and pre-acquisition costs
$
(2,609
)
 
$
(1,655
)
Amortization of intangible assets
(3,450
)
 
(3,450
)
Interest income
564

 
833

Interest expense
(143
)
 
(137
)
Equity in earnings (losses) of unconsolidated entities 
961

 
1,193

Miscellaneous, net
3,369

 
(1,856
)
Total other expense, net
$
(1,308
)
 
$
(5,072
)


8

PULTEGROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

Revenue recognition

Home sale revenues - Home sale revenues and related profit are generally recognized when title to and possession of the home are transferred to the buyer at the home closing date. Our performance obligation to deliver the agreed-upon home is generally satisfied in less than one year from the original contract date. Home sale contract assets consist of cash from home closings held in escrow for our benefit, typically for less than five days, which are considered deposits in-transit and classified as cash. Contract liabilities include customer deposit liabilities related to sold but undelivered homes, which totaled $308.9 million and $250.8 million at March 31, 2018 and December 31, 2017, respectively. Of the customer deposit liabilities at December 31, 2017, $133.9 million was recognized in revenues in the three months ended March 31, 2018 upon the closing of the related homes. See Note 8 for information on warranties and related obligations.

Land sale revenues - We periodically elect to sell parcels of land to third parties in the event such assets no longer fit into our strategic operating plans or are zoned for commercial or other development. Land sales are generally outright sales of specified land parcels with cash consideration due on the closing date, which is generally when performance obligations are satisfied.

Financial services revenues - Loan origination fees, commitment fees, and certain direct loan origination costs are recognized as incurred. Expected gains and losses from the sale of residential mortgage loans and their related servicing rights are included in the measurement of written loan commitments that are accounted for at fair value through Financial Services revenues at the time of commitment. Subsequent changes in the fair value of these loans are reflected in Financial Services revenues as they occur. Interest income is accrued from the date a mortgage loan is originated until the loan is sold. Mortgage servicing fees represent fees earned for servicing loans for various investors. Servicing fees are based on a contractual percentage of the outstanding principal balance and are credited to income when related mortgage payments are received or the sub-servicing fees are earned.

Revenues associated with our title operations are recognized as closing services are rendered and title insurance policies are issued, both of which generally occur as each home is closed. Insurance brokerage commissions relate to commissions on homeowner and other insurance policies placed with third party carriers through various agency channels. Our performance obligations for policy renewal commissions are satisfied upon issuance of the initial policy. The contract assets for estimated future renewal commissions are included in other assets and totaled $28.8 million at March 31, 2018, of which $27.7 million was recognized on January 1, 2018, in conjunction with the adoption of Accounting Standards Codification 606, "Revenue from Contracts with Customers" ("ASC 606"). Refer to "New accounting pronouncements" within Note 1 for further discussion.

Earnings per share

Basic earnings per share is computed by dividing income available to common shareholders (the “Numerator”) by the weighted-average number of common shares outstanding, adjusted for unvested shares (the “Denominator”) for the period. Computing diluted earnings per share is similar to computing basic earnings per share, except that the Denominator is increased to include the dilutive effects of stock options, unvested restricted shares, unvested restricted share units, and other potentially dilutive instruments. Any stock options that have an exercise price greater than the average market price are considered to be anti-dilutive and are excluded from the diluted earnings per share calculation.

In accordance with ASC 260 "Earnings Per Share", the two-class method determines earnings per share for each class of common stock and participating securities according to an earnings allocation formula that adjusts the Numerator for dividends or dividend equivalents and participation rights in undistributed earnings. Unvested share-based payment awards that contain non-forfeitable rights to dividends or dividend equivalents are participating securities and, therefore, are included in computing earnings per share pursuant to the two-class method. Our outstanding restricted share awards, restricted share units, and deferred shares are considered participating securities. The following table presents the earnings per common share (000's omitted, except per share data):

9

PULTEGROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

 
Three Months Ended
March 31,
2018
 
2017
Numerator:
 
 
 
Net income
$
170,751

 
$
91,518

Less: earnings distributed to participating securities
(296
)
 
(305
)
Less: undistributed earnings allocated to participating securities
(1,622
)
 
(618
)
Numerator for basic earnings per share
$
168,833

 
$
90,595

Add back: undistributed earnings allocated to participating securities
1,622

 
618

Less: undistributed earnings reallocated to participating securities
(1,614
)
 
(613
)
Numerator for diluted earnings per share
$
168,841

 
$
90,600

 
 
 
 
Denominator:
 
 
 
Basic shares outstanding
286,683

 
317,756

Effect of dilutive securities
1,343

 
2,329

Diluted shares outstanding
288,026

 
320,085

 
 
 
 
Earnings per share:
 
 
 
Basic
$
0.59

 
$
0.29

Diluted
$
0.59

 
$
0.28


Residential mortgage loans available-for-sale

Substantially all of the loans originated by us are sold in the secondary mortgage market within a short period of time after origination, generally within 30 days. At March 31, 2018 and December 31, 2017, residential mortgage loans available-for-sale had an aggregate fair value of $385.5 million and $570.6 million, respectively, and an aggregate outstanding principal balance of $374.4 million and $553.5 million, respectively. The net gain (loss) resulting from changes in fair value of these loans totaled $(0.1) million and $(2.0) million for the three months ended March 31, 2018 and 2017, respectively. These changes in fair value were substantially offset by changes in the fair value of corresponding hedging instruments. Net gains from the sale of mortgages were $27.0 million and $25.3 million for the three months ended March 31, 2018 and 2017, respectively, are included in Financial Services revenues.

Derivative instruments and hedging activities

We are party to interest rate lock commitments ("IRLCs") with customers resulting from our mortgage origination operations. At March 31, 2018 and December 31, 2017, we had aggregate IRLCs of $375.3 million and $210.9 million, respectively, which were originated at interest rates prevailing at the date of commitment. Since we can terminate a loan commitment if the borrower does not comply with the terms of the contract, and some loan commitments may expire without being drawn upon, these commitments do not necessarily represent future cash requirements. We evaluate the creditworthiness of these transactions through our normal credit policies.

We hedge our exposure to interest rate market risk relating to residential mortgage loans available-for-sale and IRLCs using forward contracts on mortgage-backed securities, which are commitments to either purchase or sell a specified financial instrument at a specified future date for a specified price, and whole loan investor commitments, which are obligations of an investor to buy loans at a specified price within a specified time period. Forward contracts on mortgage-backed securities are the predominant derivative financial instruments we use to minimize market risk during the period from the time we extend an interest rate lock to a loan applicant until the time the loan is sold to an investor. At March 31, 2018 and December 31, 2017, we had unexpired forward contracts of $539.0 million and $522.0 million, respectively, and whole loan investor commitments of $186.1 million and $203.1 million, respectively. Changes in the fair value of IRLCs and other derivative financial instruments are recognized in Financial Services revenues, and the fair values are reflected in other assets or other liabilities, as applicable.

10

PULTEGROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

There are no credit-risk-related contingent features within our derivative agreements, and counterparty risk is considered minimal. Gains and losses on IRLCs and residential mortgage loans available-for-sale are substantially offset by corresponding gains or losses on forward contracts on mortgage-backed securities and whole loan investor commitments. We are generally not exposed to variability in cash flows of derivative instruments for more than approximately 60 days.

The fair values of derivative instruments and their locations in the Condensed Consolidated Balance Sheets are summarized below ($000’s omitted):
 
 
March 31, 2018
 
December 31, 2017
 
Other Assets
 
Accrued and Other Liabilities
 
Other Assets
 
Accrued and Other Liabilities
Interest rate lock commitments
$
11,447

 
$
297

 
$
5,990

 
$
407

Forward contracts
729

 
1,646

 
432

 
817

Whole loan commitments
689

 
565

 
794

 
941

 
$
12,865

 
$
2,508

 
$
7,216

 
$
2,165


New accounting pronouncements

On January 1, 2018, we adopted ASC 606, which is a comprehensive new revenue recognition model that requires revenue to be recognized in a manner to depict the transfer of goods or services and satisfaction of performance obligations to a customer at an amount that reflects the consideration expected to be received in exchange for those goods or services. We applied the modified retrospective method to contracts that were not completed as of January 1, 2018. Results for reporting periods beginning after January 1, 2018, are presented under ASC 606, while prior period amounts are not adjusted and continue to be reported under the previous accounting standards. We recorded a net increase to opening retained earnings of $22.4 million, net of tax, as of January 1, 2018, due to the cumulative impact of adopting ASC 606, with the impact primarily related to the recognition of a contract asset for insurance brokerage commission renewals. There was not a material impact to revenues as a result of applying ASC 606 for the three months ended March 31, 2018, and there have not been significant changes to our business processes, systems, or internal controls as a result of implementing the standard.

We adopted Accounting Standards Update ("ASU") ASU No. 2016-15, "Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments" ("ASU 2016-15"), as of January 1, 2018, on a retrospective basis. The ASU addresses several specific cash flow issues. The adoption of ASU 2016-15 had no effect on our financial statements.

In February 2016, the Financial Accounting Standards Board ("FASB") issued ASU No. 2016-02, "Leases (Topic 842)" ("ASU 2016-02"), which amends the existing accounting standards for lease accounting, including requiring lessees to recognize most leases on their balance sheets. ASU 2016-02 is effective for us for annual and interim periods beginning January 1, 2019, and early adoption is permitted. The standard requires a modified retrospective transition approach for all leases existing at, or entered into after, the date of initial application. While the recognition of right-of-use assets and related liabilities will have a material effect on our consolidated balance sheets, we do not expect a material impact on our consolidated statement of operations. The FASB also issued ASU No. 2018-01, "Leases (Topic 842): Land Easement Practical Expedient for Transition to Topic 842", which provides guidance on specific transition issues. We continue to evaluate the full impact of the new standards, including the impact on our business processes, systems, and internal controls.

In June 2016, the FASB issued ASU No. 2016-13, "Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments" ("ASU 2016-13"), which changes the impairment model for most financial assets and certain other instruments from an "incurred loss" approach to a new "expected credit loss" methodology and also requires that credit losses from available-for-sale debt securities be presented as an allowance instead of a write-down. ASU 2016-13 is effective for us for annual and interim periods beginning January 1, 2020, with early adoption permitted, and requires full retrospective application on adoption. We are currently evaluating the impact the standard will have on our financial statements.

In January 2017, the FASB issued ASU No. 2017-04, "Intangibles - Goodwill and Other (Topic 350): Simplifying the Accounting for Goodwill Impairment" ("ASU 2017-04"), which removes the requirement to perform a hypothetical purchase price allocation to measure goodwill impairment. A goodwill impairment will now be the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. ASU 2017-04 is effective for us for annual

11

PULTEGROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

and interim periods beginning January 1, 2020, with early adoption permitted, and applied prospectively. We do not expect ASU 2017-04 to have a material impact on our financial statements.

2. Inventory

Major components of inventory were as follows ($000’s omitted): 
 
March 31,
2018
 
December 31,
2017
Homes under construction
$
2,716,264

 
$
2,421,405

Land under development
4,194,869

 
4,135,814

Raw land
553,895

 
589,911

 
$
7,465,028

 
$
7,147,130


We capitalize interest cost into inventory during the active development and construction of our communities. In all periods presented, we capitalized all Homebuilding interest costs into inventory because the level of our active inventory exceeded our debt levels. Information related to interest capitalized into inventory is as follows ($000’s omitted):
 
Three Months Ended
 
March 31,
 
2018
 
2017
Interest in inventory, beginning of period
$
226,611

 
$
186,097

Interest capitalized
43,960

 
44,923

Interest expensed
(30,558
)
 
(27,192
)
Interest in inventory, end of period
$
240,013

 
$
203,828


Land option agreements

We enter into land option agreements in order to procure land for the construction of homes in the future. Pursuant to these land option agreements, we generally provide a deposit to the seller as consideration for the right to purchase land at different times in the future, usually at predetermined prices. Such contracts enable us to defer acquiring portions of properties owned by third parties or unconsolidated entities until we have determined whether and when to exercise our option, which reduces our financial risks associated with long-term land holdings. Option deposits and pre-acquisition costs (such as environmental testing, surveys, engineering, and entitlement costs) are capitalized if the costs are directly identifiable with the land under option, the costs would be capitalized if we owned the land, and acquisition of the property is probable. Such costs are reflected in other assets and are reclassified to inventory upon taking title to the land. We write off deposits and pre-acquisition costs when it becomes probable that we will not go forward with the project or recover the capitalized costs. Such decisions take into consideration changes in local market conditions, the timing of required land purchases, the availability and best use of necessary incremental capital, and other factors. We record any such write-offs of deposits and pre-acquisition costs within other expense, net.

If an entity holding the land under option is a variable interest entity ("VIE"), our deposit represents a variable interest in that entity. No VIEs required consolidation at either March 31, 2018 or December 31, 2017 because we determined that we were not the VIEs' primary beneficiary. Our maximum exposure to loss related to these VIEs is generally limited to our deposits and pre-acquisition costs under the land option agreements.


12

PULTEGROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

The following provides a summary of our interests in land option agreements as of March 31, 2018 and December 31, 2017 ($000’s omitted): 
 
March 31, 2018
 
December 31, 2017
 
Deposits and
Pre-acquisition
Costs
 
Remaining Purchase
Price
 
Deposits and
Pre-acquisition
Costs
 
Remaining Purchase
Price
Land options with VIEs
$
70,600

 
$
820,231

 
$
78,889

 
$
977,480

Other land options
140,277

 
1,487,583

 
129,098

 
1,485,099

 
$
210,877

 
$
2,307,814

 
$
207,987

 
$
2,462,579


3. Segment information

Our Homebuilding operations are engaged in the acquisition and development of land primarily for residential purposes within the U.S. and the construction of housing on such land. For reporting purposes, our Homebuilding operations are aggregated into six reportable segments:
Northeast:
 
Connecticut, Maryland, Massachusetts, New Jersey, New York, Pennsylvania, Virginia
Southeast:
 
Georgia, North Carolina, South Carolina, Tennessee
Florida:
 
Florida
Midwest:
 
Illinois, Indiana, Kentucky, Michigan, Minnesota, Missouri, Ohio
Texas:
 
Texas
West:
 
Arizona, California, Nevada, New Mexico, Washington

We also have a reportable segment for our Financial Services operations, which consist principally of mortgage banking and title operations and operate generally in the same markets as the Homebuilding segments.

 
Operating Data by Segment
($000’s omitted)
 
Three Months Ended
 
March 31,
 
2018
 
2017
Revenues:
 
 
 
Northeast
$
132,436

 
$
108,601

Southeast
374,623

 
329,113

Florida
348,709

 
314,296

Midwest
297,506

 
244,506

Texas
246,638

 
234,541

West
524,243

 
357,054

 
$
1,924,155

 
$
1,588,111

Financial Services
45,938

 
41,767

Consolidated revenues
$
1,970,093

 
$
1,629,878

 
 
 
 

13

PULTEGROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

 
Operating Data by Segment
($000’s omitted)
 
Three Months Ended
 
March 31,
 
2018
 
2017
Income before income taxes:
 
 
 
Northeast
$
9,312

 
$
4,400

Southeast
40,457

 
32,366

Florida
44,945

 
44,523

Midwest
28,401

 
18,254

Texas
30,536

 
32,796

West
89,205

 
34,084

Other homebuilding (a)
(32,498
)
 
(40,661
)
 
$
210,358

 
$
125,762

Financial Services
13,833

 
13,503

Consolidated income before income taxes
$
224,191

 
$
139,265


(a)
Other homebuilding includes the amortization of intangible assets and capitalized interest and other items not allocated to the operating segments, including: write-offs of $15.0 million of insurance receivables associated with the resolution of certain insurance matters in the three months ended March 31, 2017 (see Note 8).
 
Operating Data by Segment
 
($000's omitted)
 
March 31, 2018
 
Homes Under
Construction
 
Land Under
Development
 
Raw Land
 
Total
Inventory
 
Total
Assets
Northeast
$
267,520

 
$
323,571

 
$
73,577

 
$
664,668

 
$
813,724

Southeast
484,647

 
621,417

 
112,444

 
1,218,508

 
1,345,180

Florida
435,660

 
881,107

 
86,155

 
1,402,922

 
1,527,872

Midwest
321,719

 
444,360

 
38,353

 
804,432

 
882,493

Texas
300,113

 
422,804

 
89,779

 
812,696

 
903,537

West
857,312

 
1,247,263

 
131,711

 
2,236,286

 
2,420,444

Other homebuilding (a)
49,293

 
254,347

 
21,876

 
325,516

 
1,332,972

 
$
2,716,264

 
$
4,194,869

 
$
553,895

 
$
7,465,028

 
$
9,226,222

Financial Services
—

 
—

 
—

 
—

 
480,173

 
$
2,716,264

 
$
4,194,869

 
$
553,895

 
$
7,465,028

 
$
9,706,395

 
 
 
 
 
 
 
 
 
 

14

PULTEGROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

 
Operating Data by Segment
 
($000's omitted)
 
December 31, 2017
 
Homes Under
Construction
 
Land Under
Development
 
Raw Land
 
Total
Inventory
 
Total
Assets
Northeast
$
234,413

 
$
327,599

 
$
73,574

 
$
635,586

 
$
791,511

Southeast
433,411

 
613,626

 
121,238

 
1,168,275

 
1,287,992

Florida
359,651

 
876,856

 
109,069

 
1,345,576

 
1,481,837

Midwest
299,896

 
476,694

 
28,482

 
805,072

 
877,282

Texas
251,613

 
435,018

 
87,392

 
774,023

 
859,847

West
798,706

 
1,137,940

 
147,493

 
2,084,139

 
2,271,328

Other homebuilding (a)
43,715

 
268,081

 
22,663

 
334,459

 
1,469,234

 
$
2,421,405

 
$
4,135,814

 
$
589,911

 
$
7,147,130

 
$
9,039,031

Financial Services
—

 
—

 
—

 
—

 
647,618

 
$
2,421,405

 
$
4,135,814

 
$
589,911

 
$
7,147,130

 
$
9,686,649

 
(a)
Other homebuilding primarily includes cash and equivalents, capitalized interest, intangibles, deferred tax assets, and other corporate items that are not allocated to the operating segments.

4. Debt

Notes payable

Our senior notes are summarized as follows ($000’s omitted):
 
March 31,
2018
 
December 31,
2017
4.250% unsecured senior notes due March 2021 (a)
$
700,000

 
$
700,000

5.500% unsecured senior notes due March 2026 (a)
700,000

 
700,000

5.000% unsecured senior notes due January 2027 (a)
600,000

 
600,000

7.875% unsecured senior notes due June 2032 (a)
300,000

 
300,000

6.375% unsecured senior notes due May 2033 (a)
400,000

 
400,000

6.000% unsecured senior notes due February 2035 (a)
300,000

 
300,000

Net premiums, discounts, and issuance costs (b)
(13,105
)
 
(13,057
)
Total senior notes
$
2,986,895

 
$
2,986,943

Other notes payable
100,823

 
20,024

Notes payable
$
3,087,718

 
$
3,006,967

Estimated fair value
$
3,076,140

 
$
3,263,774


(a)
Redeemable prior to maturity; guaranteed on a senior basis by certain wholly-owned subsidiaries.
(b)
The carrying value of senior notes reflects the impact of premiums, discounts, and issuance costs that are amortized to interest cost over the respective terms of the senior notes.

Other notes payable include non-recourse and limited recourse collateralized notes with third parties that totaled $100.8 million and $20.0 million at March 31, 2018 and December 31, 2017, respectively. These notes have maturities ranging up to three years, are secured by the applicable land positions to which they relate, and have no recourse to any other assets. The stated interest rates on these notes range up to 7.53%. In the three months ended March 31, 2018, we borrowed $81.2 million under one note to finance the acquisition of land. We fully repaid this note in April 2018.

15

PULTEGROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

Revolving credit facility

We maintain a senior unsecured revolving credit facility (the “Revolving Credit Facility”) with a maximum borrowing capacity of $1.0 billion that matures in June 2019. The Revolving Credit Facility contains an uncommitted accordion feature that could increase the capacity to $1.25 billion, subject to certain conditions and availability of additional bank commitments. The Revolving Credit Facility also provides for the issuance of letters of credit that reduce the available borrowing capacity under the Revolving Credit Facility, with a sublimit of $375.0 million at March 31, 2018. The interest rate on borrowings under the Revolving Credit Facility may be based on either the London Interbank Offered Rate ("LIBOR") or a base rate plus an applicable margin, as defined therein. At March 31, 2018, we had no borrowings outstanding and $226.3 million of letters of credit issued under the Revolving Credit Facility. At December 31, 2017, we had no borrowings outstanding and $235.5 million of letters of credit issued under the Revolving Credit Facility.

The Revolving Credit Facility contains financial covenants that require us to maintain a minimum Tangible Net Worth, a minimum Interest Coverage Ratio, and a maximum Debt-to-Capitalization Ratio (as each term is defined in the Revolving Credit Facility). As of March 31, 2018, we were in compliance with all covenants. Our available and unused borrowings
under the Revolving Credit Facility, net of outstanding letters of credit, amounted to $773.7 million and $764.5 million at March 31, 2018 and December 31, 2017, respectively.

Joint venture debt

At March 31, 2018, aggregate outstanding debt of unconsolidated joint ventures was $57.8 million, of which $57.0 million was related to one joint venture in which we have a 50% interest. In connection with this loan, we and our joint venture partner provided customary limited recourse guaranties under which our maximum financial loss exposure is limited to our pro rata share of the debt outstanding. The limited guaranties include, but are not limited to: (i) completion of certain aspects of the project; (ii) an environmental indemnity provided to the lender; and (iii) an indemnification of the lender from certain "bad boy acts" of the joint venture.

Financial Services debt

Pulte Mortgage maintains a master repurchase agreement with third party lenders (the “Repurchase Agreement”) that matures in August 2018. The maximum aggregate commitment was $250.0 million at March 31, 2018, and increased to $350.0 million from April 18, 2018 through June 25, 2018, after which it increases to $400.0 million through maturity. The purpose of changes in capacity during the term of the agreement is to lower associated fees during seasonally lower volume periods of mortgage origination activity. Borrowings under the Repurchase Agreement are secured by residential mortgage loans available-for-sale. The Repurchase Agreement contains various affirmative and negative covenants applicable to Pulte Mortgage, including quantitative thresholds related to net worth, net income, and liquidity. Pulte Mortgage had $247.0 million and $437.8 million outstanding under the Repurchase Agreement at March 31, 2018 and December 31, 2017, respectively, and was in compliance with all of its covenants and requirements as of such dates.

5. Shareholders’ equity

During the three months ended March 31, 2018, we declared cash dividends totaling $26.1 million and repurchased 1.7 million shares under our repurchase authorization for $52.5 million. For the three months ended March 31, 2017, we declared cash dividends totaling $28.8 million and repurchased 4.7 million shares under our repurchase authorization for $100.0 million. At March 31, 2018, we had remaining authorization to repurchase $542.0 million of common shares.

Under our share-based compensation plans, we accept shares as payment under certain conditions related to stock option exercises and vesting of shares, generally related to the payment of minimum tax obligations. During the three months ended March 31, 2018 and 2017, participants surrendered shares valued at $7.0 million and $5.5 million, respectively, under these plans. Such share transactions are excluded from the above noted share repurchase authorization.


16

PULTEGROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

6. Income taxes

Our effective tax rate for the three months ended March 31, 2018 was 23.8%, compared to 34.3% for the same period in 2017. Our effective tax rate differs from the federal statutory rate primarily due to state income tax expense on current year earnings and tax benefits for equity compensation. For the same period in the prior year, our effective tax rate differed from the federal statutory tax rate primarily due to state income tax expense on current year earnings and tax benefits for equity compensation, as well as the domestic production activities deduction. The federal statutory rate was reduced from 35% in 2017 to 21% in 2018 due to the Tax Cuts and Jobs Act (the “Tax Act”), which was enacted on December 22, 2017.

We have not fully completed our accounting for the income tax effects of the Tax Act. As discussed in the SEC Staff Accounting Bulletin No. 118, the accounting for the Tax Act should be completed within one year from the Tax Act enactment. During the three months ended March 31, 2018, we have made no adjustments to the provisional amounts recorded at December 31, 2017. Any adjustments to the provisional amounts recorded at December 31, 2017 will be reflected upon the completion of our accounting for the Tax Act.

At March 31, 2018 and December 31, 2017, we had deferred tax assets, net of deferred tax liabilities and valuation allowance, of $614.9 million and $645.3 million, respectively. The accounting for deferred taxes is based upon estimates of future results. Differences between estimated and actual results could result in changes in the valuation of deferred tax assets that could have a material impact on our consolidated results of operations or financial position. Changes in existing tax laws could also affect actual tax results and the realization of deferred tax assets over time.

Unrecognized tax benefits represent the difference between tax positions taken or expected to be taken in a tax return and the benefits recognized for financial statement purposes. At both March 31, 2018 and December 31, 2017, we had $48.6 million of gross unrecognized tax benefits and $5.1 million and $4.9 million, respectively, of related accrued interest and penalties. It is reasonably possible within the next twelve months that our gross unrecognized tax benefits may decrease by up to $39.9 million, excluding interest and penalties, primarily due to potential audit settlements.

17

PULTEGROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)


7. Fair value disclosures

ASC 820, “Fair Value Measurements and Disclosures,” provides a framework for measuring fair value in generally accepted accounting principles and establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The fair value hierarchy can be summarized as follows: 
Level 1
 
Fair value determined based on quoted prices in active markets for identical assets or liabilities.
 
 
Level 2
 
Fair value determined using significant observable inputs, generally either quoted prices in active markets for similar assets or liabilities or quoted prices in markets that are not active.
 
 
Level 3
 
Fair value determined using significant unobservable inputs, such as pricing models, discounted cash flows, or similar techniques.

Our assets and liabilities measured or disclosed at fair value are summarized below ($000’s omitted): 
Financial Instrument
 
Fair Value
Hierarchy
 
Fair Value
March 31,
2018
 
December 31,
2017
 
 
 
 
 
 
 
Measured at fair value on a recurring basis:
 
 
 
 
 
 
Residential mortgage loans available-for-sale
 
Level 2
 
$
385,453

 
$
570,600

Interest rate lock commitments
 
Level 2
 
11,150

 
5,583

Forward contracts
 
Level 2
 
(917
)
 
(385
)
Whole loan commitments
 
Level 2
 
124

 
(147
)
 
 
 
 
 
 
 
Measured at fair value on a non-recurring basis:
 
 
 
 
 
 
House and land inventory
 
Level 3
 
$
—

 
$
11,045

Land held for sale
 
Level 2
 
2,086

 
8,600

 
 
 
 
 
 
 
Disclosed at fair value:
 
 
 
 
 
 
Cash, cash equivalents, and restricted cash
 
Level 1
 
$
184,787

 
$
306,168

Financial Services debt
 
Level 2
 
246,952

 
437,804

Other notes payable
 
Level 2
 
100,823

 
20,024

Senior notes payable
 
Level 2
 
2,975,317

 
3,243,750


Fair values for agency residential mortgage loans available-for-sale are determined based on quoted market prices for comparable instruments. Fair values for non-agency residential mortgage loans available-for-sale are determined based on purchase commitments from whole loan investors and other relevant market information available to management. Fair values for interest rate lock commitments, including the value of servicing rights, and forward contracts on mortgage-backed securities are valued based on market prices for similar instruments. Fair values for whole loan commitments are based on market prices for similar instruments from the specific whole loan investor.

Certain assets are required to be recorded at fair value on a non-recurring basis when events and circumstances indicate that the carrying value may not be recoverable. The non-recurring fair values included in the above table represent only those assets whose carrying values were adjusted to fair value as of the respective balance sheet dates.

The carrying amounts of cash and equivalents, Financial Services debt, and other notes payable approximate their fair values due to their short-term nature and/or floating interest rate terms. The fair values of senior notes are based on quoted market prices, when available. If quoted market prices are not available, fair values are based on quoted market prices of similar issues. The carrying value of senior notes was $3.0 billion at both March 31, 2018 and December 31, 2017.

18

PULTEGROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)


8. Commitments and contingencies

Loan origination liabilities

Our mortgage operations may be responsible for losses associated with mortgage loans originated and sold to investors in the event of errors or omissions relating to representations and warranties made by us that the loans met certain requirements, including representations as to underwriting standards, the existence of primary mortgage insurance, and the validity of certain borrower representations in connection with the loan. Determining the liabilities for anticipated losses requires a significant level of management judgment. Given the nature of these claims and the uncertainty regarding their ultimate resolution, actual costs could differ from our current estimates. Loan origination reserves totaled $34.6 million at both March 31, 2018 and December 31, 2017.

Letters of credit and surety bonds

In the normal course of business, we post letters of credit and surety bonds pursuant to certain performance-related obligations, as security for certain land option agreements, and under various insurance programs. The majority of these letters of credit and surety bonds are in support of our land development and construction obligations to various municipalities, other government agencies, and utility companies related to the construction of roads, sewers, and other infrastructure. We had outstanding letters of credit and surety bonds totaling $226.3 million and $1.2 billion, respectively, at March 31, 2018 and $235.5 million and $1.2 billion, respectively, at December 31, 2017. In the event any such letter of credit or surety bond is drawn, we would be obligated to reimburse the issuer of the letter of credit or surety bond. We do not believe that a material amount, if any, of the letters of credit or surety bonds will be drawn. Our surety bonds generally do not have stated expiration dates; rather we are released from the surety bonds as the underlying contractual performance is completed. Because significant construction and development work has been performed related to projects that have not yet received final acceptance by the respective counterparties, the aggregate amount of surety bonds outstanding is in excess of the projected cost of the remaining work to be performed.

Litigation and regulatory matters

We are involved in various litigation and legal claims in the normal course of our business operations, including actions brought on behalf of various classes of claimants. We are also subject to a variety of local, state, and federal laws and regulations related to land development activities, house construction standards, sales practices, mortgage lending operations, employment practices, and protection of the environment. As a result, we are subject to periodic examination or inquiry by various governmental agencies that administer these laws and regulations.

We establish liabilities for legal claims and regulatory matters when such matters are both probable of occurring and any potential loss is reasonably estimable. We accrue for such matters based on the facts and circumstances specific to each matter and revise these estimates as the matters evolve. In such cases, there may exist an exposure to loss in excess of any amounts currently accrued. In view of the inherent difficulty of predicting the outcome of these legal and regulatory matters, we generally cannot predict the ultimate resolution of the pending matters, the related timing, or the eventual loss. While the outcome of such contingencies cannot be predicted with certainty, we do not believe that the resolution of such matters will have a material adverse impact on our results of operations, financial position, or cash flows. However, to the extent the liability arising from the ultimate resolution of any matter exceeds the estimates reflected in the recorded reserves relating to such matter, we could incur additional charges that could be significant.

Allowance for warranties

Home purchasers are provided with a limited warranty against certain building defects, including a one-year comprehensive limited warranty and coverage for certain other aspects of the home’s construction and operating systems for periods of up to and, in limited instances, exceeding 10 years. We estimate the costs to be incurred under these warranties and record liabilities in the amount of such costs at the time product revenue is recognized. Factors that affect our warranty liabilities include the number of homes sold, historical and anticipated rates of warranty claims, and the cost per claim. We periodically assess the adequacy of the warranty liabilities for each geographic market in which we operate and adjust the amounts as necessary. Actual warranty costs in the future could differ from the current estimates. Changes to warranty liabilities were as follows ($000’s omitted):

19

PULTEGROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

 
Three Months Ended
 
March 31,
 
2018
 
2017
Warranty liabilities, beginning of period
$
72,709

 
$
66,134

Reserves provided
11,916

 
10,643

Payments
(14,282
)
 
(12,099
)
Other adjustments
643

 
3

Warranty liabilities, end of period
$
70,986

 
$
64,681


Self-insured risks

We maintain, and require our subcontractors to maintain, general liability insurance coverage. We also maintain builders' risk, property, errors and omissions, workers' compensation, and other business insurance coverage. These insurance policies protect us against a portion of the risk of loss from claims. However, we retain a significant portion of the overall risk for such claims either through policies issued by our captive insurance subsidiaries or through our own self-insured per occurrence and aggregate retentions, deductibles, and claims in excess of available insurance policy limits.

Our general liability insurance includes coverage for certain construction defects. While construction defect claims can relate to a variety of circumstances, the majority of our claims relate to alleged problems with siding, plumbing, foundations and other concrete work, windows, roofing, and heating, ventilation and air conditioning systems. The availability of general liability insurance for the homebuilding industry and its subcontractors has become increasingly limited, and the insurance policies available require us to maintain significant per occurrence and aggregate retention levels. In certain instances, we may offer our subcontractors the opportunity to purchase insurance through one of our captive insurance subsidiaries or participate in a project-specific insurance program provided by us. Policies issued by our captive insurance subsidiaries represent self-insurance of these risks by us. This self-insured exposure is limited by reinsurance policies that we purchase. General liability coverage for the homebuilding industry is complex, and our coverage varies from policy year to policy year. Our insurance coverage requires a per occurrence deductible up to an overall aggregate retention level. Beginning with the first dollar, amounts paid to satisfy insured claims apply to our per occurrence and aggregate retention obligations. Any amounts incurred in excess of the occurrence or aggregate retention levels are covered by insurance up to our purchased coverage levels. Our insurance policies, including the captive insurance subsidiaries' reinsurance policies, are maintained with highly-rated underwriters for whom we believe counterparty default risk is not significant.

At any point in time, we are managing over 1,000 individual claims related to general liability, property, errors and omissions, workers' compensation, and other business insurance coverage. We reserve for costs associated with such claims (including expected claims management expenses) on an undiscounted basis at the time revenue is recognized for each home closing and evaluate the recorded liabilities based on actuarial analyses of our historical claims. The actuarial analyses calculate estimates of the ultimate net cost of all unpaid losses, including estimates for incurred but not reported losses ("IBNR"). IBNR represents losses related to claims incurred but not yet reported plus development on reported claims.

Our recorded reserves for all such claims totaled $771.1 million and $758.8 million at March 31, 2018 and December 31, 2017, respectively, the vast majority of which relate to general liability claims. The recorded reserves include loss estimates related to both (i) existing claims and related claim expenses and (ii) IBNR and related claim expenses. Liabilities related to IBNR and related claim expenses represented approximately 64% and 65% of the total general liability reserves at March 31, 2018 and December 31, 2017, respectively. The actuarial analyses that determine the IBNR portion of reserves consider a variety of factors, including the frequency and severity of losses, which are based on our historical claims experience supplemented by industry data. The actuarial analyses of the reserves also consider historical third party recovery rates and claims management expenses.

Housing market conditions have been volatile across most of our markets over the past ten years, and we believe such conditions can affect the frequency and cost of construction defect claims. Additionally, IBNR estimates comprise the majority of our liability and are subject to a high degree of uncertainty due to a variety of factors, including changes in claims reporting and resolution patterns, third party recoveries, insurance industry practices, the regulatory environment, and legal precedent. State regulations vary, but construction defect claims are reported and resolved over an extended period often exceeding ten years. Changes in the frequency and timing of reported claims and estimates of specific claim values can impact the underlying inputs and trends utilized in the actuarial analyses, which could have a material impact on the recorded reserves. Additionally,

20

PULTEGROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

the amount of insurance coverage available for each policy period also impacts our recorded reserves. Because of the inherent uncertainty in estimating future losses and the timing of such losses related to these claims, actual costs could differ significantly from estimated costs. Adjustments to reserves are recorded in the period in which the change in estimate occurs.

Costs associated with our insurance programs are classified within selling, general, and administrative expenses. Changes in these liabilities were as follows ($000's omitted):
 
Three Months Ended
 
March 31,
 
2018
 
2017
Balance, beginning of period
$
758,812

 
$
831,058

Reserves provided, net
19,660

 
19,715

Adjustments to previously recorded reserves
2,461

 
(1,980
)
Payments, net (a)
(9,829
)
 
(13,467
)
Balance, end of period
$
771,104

 
$
835,326


(a)
Includes net changes in amounts expected to be recovered from our insurance carriers, which are recorded in other assets (see below).

In certain instances, we have the ability to recover a portion of our costs under various insurance policies or from subcontractors or other third parties. Estimates of such amounts are recorded when recovery is considered probable. Such receivables are recorded in other assets and totaled $217.1 million and $213.4 million at March 31, 2018 and December 31, 2017, respectively. The insurance receivables relate to costs incurred to perform corrective repairs, settle claims with customers, and other costs related to the continued progression of construction defect claims that we believe are insured. Given the complexity inherent with resolving construction defect claims in the homebuilding industry as described above, there generally exists a significant lag between our payment of claims and our reimbursements from applicable insurance carriers. In addition, disputes between homebuilders and carriers over coverage positions relating to construction defect claims are common. Resolution of claims with carriers involves the exchange of significant amounts of information and frequently involves legal action. During the three months ended March 31, 2017, we wrote-off $15.0 million of insurance receivables in conjunction with settling insurance policies with multiple carriers covering multiple years.

Additionally, at March 31, 2018, we are the plaintiff in litigation with certain of our insurance carriers in regard to $70.1 million of recorded insurance receivables relating to the applicability of coverage to such costs under their policies. We believe collection of these insurance receivables, including those in litigation, is probable based on the legal merits of our positions after review by legal counsel, favorable legal rulings received to date, the high credit ratings of our carriers, and our long history of collecting significant amounts of insurance reimbursements under similar insurance policies related to similar claims. While the outcome of these matters cannot be predicted with certainty, we do not believe that the resolution of such matters will have a material adverse impact on our results of operations, financial position, or cash flows.

21

PULTEGROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)



9. Supplemental Guarantor information

All of our senior notes are guaranteed jointly and severally on a senior basis by certain of our wholly-owned Homebuilding subsidiaries and certain other wholly-owned subsidiaries (collectively, the “Guarantors”). Such guaranties are full and unconditional. Our subsidiaries comprising the Financial Services segment along with certain other subsidiaries (collectively, the "Non-Guarantor Subsidiaries") do not guarantee the senior notes. In accordance with Rule 3-10 of Regulation S-X, supplemental consolidating financial information of the Company, including such information for the Guarantors, is presented below. Investments in subsidiaries are presented using the equity method of accounting.


 CONDENSED CONSOLIDATING BALANCE SHEET
MARCH 31, 2018
($000’s omitted)
 
Unconsolidated
 
Eliminating
Entries
 
Consolidated
PulteGroup,
Inc.
 
PulteGroup,
Inc.
 
Guarantor
Subsidiaries
 
Non-Guarantor
Subsidiaries
 
ASSETS
 
 
 
 
 
 
 
 
 
Cash and equivalents
$
—


$
103,470


$
47,351


$
—


$
150,821

Restricted cash
—


32,126


1,840


—


33,966

Total cash, cash equivalents, and
restricted cash
—


135,596


49,191


—


184,787

House and land inventory
—


7,365,173


99,855


—


7,465,028

Land held for sale
—


69,522


—


—


69,522

Residential mortgage loans available-
for-sale
—


—


385,453


—


385,453

Investments in unconsolidated entities
—


64,270


540


—


64,810

Other assets
8,101


598,044


178,210


—


784,355

Intangible assets
—


137,542


—


—


137,542

Deferred tax assets, net
622,328


—


(7,430
)

—


614,898

Investments in subsidiaries and
intercompany accounts, net
6,815,152


243,456


7,645,565


(14,704,173
)

—


$
7,445,581


$
8,613,603


$
8,351,384


$
(14,704,173
)

$
9,706,395

LIABILITIES AND SHAREHOLDERS' EQUITY
 
 
 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
 
 
 
Accounts payable, customer deposits,
accrued and other liabilities
$
68,362


$
1,648,861


$
264,178


$
—


$
1,981,401

Income tax liabilities
115,667


—


—


—


115,667

Financial Services debt
—


—


246,952


—


246,952

Notes payable
2,986,895


99,160


1,663


—


3,087,718

Total liabilities
3,170,924


1,748,021


512,793


—


5,431,738

Total shareholders’ equity
4,274,657


6,865,582


7,838,591


(14,704,173
)

4,274,657


$
7,445,581


$
8,613,603


$
8,351,384


$
(14,704,173
)

$
9,706,395



22

PULTEGROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

CONDENSED CONSOLIDATING BALANCE SHEET
DECEMBER 31, 2017
($000’s omitted)

 
Unconsolidated
 
Eliminating
Entries
 
Consolidated
PulteGroup,
Inc.
 
PulteGroup,
Inc.
 
Guarantor
Subsidiaries
 
Non-Guarantor
Subsidiaries
 
ASSETS
 
 
 
 
 
 
 
 
 
Cash and equivalents
$
—


$
125,462


$
147,221


$
—


$
272,683

Restricted cash
—


32,339


1,146


—


33,485

Total cash, cash equivalents, and
restricted cash
—


157,801


148,367


—


306,168

House and land inventory
—


7,053,087


94,043


—


7,147,130

Land held for sale
—


68,384


—


—


68,384

Residential mortgage loans available-
for-sale
—


—


570,600


—


570,600

Investments in unconsolidated entities
—


62,415


542


—


62,957

Other assets
9,417


592,045


143,661


—


745,123

Intangible assets
—


140,992


—


—


140,992

Deferred tax assets, net
646,227


—


(932
)

—


645,295

Investments in subsidiaries and
intercompany accounts, net
6,661,638


284,983


7,300,127


(14,246,748
)

—


$
7,317,282


$
8,359,707


$
8,256,408


$
(14,246,748
)

$
9,686,649

LIABILITIES AND SHAREHOLDERS' EQUITY
 
 
 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
 
 
 
Accounts payable, customer deposits,
accrued and other liabilities
$
89,388


$
1,636,913


$
274,626


$
—


$
2,000,927

Income tax liabilities
86,925


—


—


—


86,925

Financial Services debt
—


—


437,804


—


437,804

Notes payable
2,986,943


16,911


3,113


—


3,006,967

Total liabilities
3,163,256


1,653,824


715,543


—


5,532,623

Total shareholders’ equity
4,154,026


6,705,883


7,540,865


(14,246,748
)

4,154,026


$
7,317,282


$
8,359,707


$
8,256,408


$
(14,246,748
)

$
9,686,649



23

PULTEGROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

CONSOLIDATING STATEMENT OF OPERATIONS AND COMPREHENSIVE INCOME
For the three months ended March 31, 2018
($000’s omitted)
 
Unconsolidated
 
 
 
Consolidated
PulteGroup, 
Inc.
 
PulteGroup,
Inc.
 
Guarantor
Subsidiaries
 
Non-Guarantor
Subsidiaries
 
Eliminating
Entries
 
Revenues:
 
 
 
 
 
 
 
 
 
Homebuilding
 
 
 
 
 
 
 
 
 
Home sale revenues
$
—

 
$
1,885,431

 
$
26,167

 
$
—

 
$
1,911,598

Land sale and other revenues
—

 
11,558

 
999

 
—

 
12,557

 
—

 
1,896,989

 
27,166

 
—

 
1,924,155

Financial Services
—

 
—

 
45,938

 
—

 
45,938

 
—

 
1,896,989

 
73,104

 
—

 
1,970,093

Homebuilding Cost of Revenues:
 
 
 
 
 
 
 
 
 
Home sale cost of revenues
—

 
(1,438,347
)
 
(21,593
)
 
—

 
(1,459,940
)
Land sale cost of revenues
—

 
(10,830
)
 
(718
)
 
—

 
(11,548
)
 
—

 
(1,449,177
)
 
(22,311
)
 
—

 
(1,471,488
)
Financial Services expenses
—

 
(142
)
 
(32,071
)
 
—

 
(32,213
)
Selling, general, and administrative
expenses
—

 
(231,418
)
 
(9,475
)
 
—

 
(240,893
)
Other expense, net
(142
)
 
(7,601
)
 
6,435

 
—

 
(1,308
)
Intercompany interest
(1,468
)
 
—

 
1,468

 
—

 
—

Income (loss) before income taxes and
equity in income (loss) of
subsidiaries
(1,610
)
 
208,651

 
17,150

 
—

 
224,191

Income tax (expense) benefit
387

 
(49,531
)
 
(4,296
)
 
—

 
(53,440
)
Income (loss) before equity in income
(loss) of subsidiaries
(1,223
)
 
159,120

 
12,854

 
—

 
170,751

Equity in income (loss) of subsidiaries
171,974

 
12,564

 
110,671

 
(295,209
)
 
—

Net income (loss)
170,751

 
171,684

 
123,525

 
(295,209
)
 
170,751

Other comprehensive income
21

 
—

 
—

 
—

 
21

Comprehensive income (loss)
$
170,772

 
$
171,684

 
$
123,525

 
$
(295,209
)
 
$
170,772



24

PULTEGROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

CONSOLIDATING STATEMENT OF OPERATIONS AND COMPREHENSIVE INCOME
For the three months ended March 31, 2017
($000’s omitted)
 
Unconsolidated
 
 
 
Consolidated
PulteGroup, 
Inc.
 
PulteGroup,
Inc.
 
Guarantor
Subsidiaries
 
Non-Guarantor
Subsidiaries
 
Eliminating
Entries
 
Revenues:
 
 
 
 
 
 
 
 
 
Homebuilding
 
 
 
 
 
 
 
 
 
Home sale revenues
$
—

 
$
1,576,645

 
$
8,776

 
$
—

 
$
1,585,421

Land sale and other revenues
—

 
1,912

 
778

 
—

 
2,690

 
—

 
1,578,557

 
9,554

 
—

 
1,588,111

Financial Services
—

 
—

 
41,767

 
—

 
41,767

 
—

 
1,578,557

 
51,321

 
—

 
1,629,878

Homebuilding Cost of Revenues:
 
 
 
 
 
 
 
 
 
Home sale cost of revenues
—

 
(1,209,640
)
 
(8,038
)
 
—

 
(1,217,678
)
Land sale cost of revenues
—

 
(2,595
)
 
(633
)
 
—

 
(3,228
)
 
—

 
(1,212,235
)
 
(8,671
)
 
—

 
(1,220,906
)
Financial Services expenses
—

 
(139
)
 
(28,228
)
 
—

 
(28,367
)
Selling, general, and administrative
expenses
—

 
(217,975
)
 
(18,293
)
 
—

 
(236,268
)
Other expense, net
(130
)
 
(12,888
)
 
7,946

 
—

 
(5,072
)
Intercompany interest
(335
)
 
—

 
335

 
—

 
—

Income (loss) before income taxes and
equity in income (loss) of
subsidiaries
(465
)
 
135,320

 
4,410

 
—

 
139,265

Income tax (expense) benefit
177

 
(45,925
)
 
(1,999
)
 
—

 
(47,747
)
Income (loss) before equity in income
(loss) of subsidiaries
(288
)
 
89,395

 
2,411

 
—

 
91,518

Equity in income (loss) of subsidiaries
91,806

 
7,253

 
37,309

 
(136,368
)
 
—

Net income (loss)
91,518

 
96,648

 
39,720

 
(136,368
)
 
91,518

Other comprehensive income
21

 
—

 
—

 
—

 
21

Comprehensive income (loss)
$
91,539

 
$
96,648

 
$
39,720

 
$
(136,368
)
 
$
91,539

















25

PULTEGROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

CONSOLIDATING STATEMENT OF CASH FLOWS
For the three months ended March 31, 2018
($000’s omitted)
 
Unconsolidated
 
 
 
Consolidated
PulteGroup, Inc.
 
PulteGroup,
Inc.
 
Guarantor
Subsidiaries
 
Non-Guarantor
Subsidiaries
 
Eliminating
Entries
 
Net cash provided by (used in)
operating activities
$
310,937

 
$
(340,357
)
 
$
198,433

 
$
—

 
$
169,013

Cash flows from investing activities:
 
 
 
 
 
 
 
 
 
Capital expenditures
—

 
(13,537
)
 
(1,891
)
 
—

 
(15,428
)
Investments in unconsolidated entities
—

 
(1,000
)
 
—

 
—

 
(1,000
)
Other investing activities, net
—

 
—

 
452

 
—

 
452

Net cash provided by (used in)
investing activities
—

 
(14,537
)
 
(1,439
)
 
—

 
(15,976
)
Cash flows from financing activities:
 
 
 
 
 
 
 
 
 
Financial Services borrowings (repayments)
—

 
—

 
(190,852
)
 
—

 
(190,852
)
Repayments of debt
—

 
—

 
(451
)
 
—

 
(451
)
Borrowings under revolving credit facility
768,000

 
—

 
—

 
—

 
768,000

Repayments under revolving credit facility